Do you know the difference between credit and debit? A comprehensive guide to understanding accounting balances.
Do you know the difference between credit and debit? A comprehensive guide to understanding accounting balances.
discover | Saturday - 07 / 02 / 2026 - 8:53 am
What are the debit and credit principles?
The debit and credit principles are the cornerstone of the globally accepted dual accounting system (this is according to International Financial Reporting Standards “IFRS” and American General Accounting Standards “GAAP”).
Do you know the difference between credit and debit A comprehensive guide to understanding accounting balances
This system, founded by Italian mathematician Luca Pacioli in 1494, ensures the accuracy of financial records through the fundamental principle of accounting balance.
According to a study published in the Journal of Accounting Research in 2023, 73% of accounting errors in startups are due to the misapplication of debit and credit rules. This results in global financial losses estimated at approximately $12.5 billion annually.
In this comprehensive guide, learn about a set of practical tools and proven strategies that will enable you to apply these two principles efficiently and professionally.
But what is the concept of debit and credit in accounting?
Debit and credit form the basis of the double-entry accounting system. Debit represents the left side of the account, while credit represents the right side.
The Italian mathematician Luca Pacioli laid the foundations of this system in the fifteenth century, and it remains the cornerstone of all modern accounting systems to this day.
A golden rule: In any accounting transaction, the sum of debits must equal the sum of credits. This is called the accounting balance principle.
Some may wonder how the debit and credit system works. Therefore, we invite you to continue reading to gain a comprehensive and integrated knowledge of these basic accounting systems and understand their working mechanisms in a clear manner that will help you apply them professionally in your business.
How the debit and credit system works:
Here is a clear explanation of how the debit and credit system works as it is used in accounting:
- Double-entry bookkeeping (the basis of the accounting system):
The double-entry bookkeeping system is based on a fundamental and intuitive accounting principle, whereby each financial transaction affects at least two accounts in a balanced and integrated manner. According to this principle, when the value in one account increases, a similar value in another account must necessarily decrease, or increase, on the opposite side of the same account, to ensure that the basic accounting equation remains balanced at all times.
Practical Example:
Let’s assume that a company purchased new equipment for SAR 50,000, and payment was made in cash:
Accounting Entries:
From the Equipment Account: SAR 50,000 (debit).
Reason: There has been an increase in the company’s assets.
To the Cash Account: SAR 50,000 (credit).
Reason: There has been a decrease in cash assets.
Accounting Result:
This method maintains a perfect balance in the accounting books, as the total debit balances are exactly equal to the total credit balances, confirming the accuracy of the accounting records and the integrity of the company’s financial system.
– Debit and Credit Rules for Each Account Type:
Asset Accounts:
Debit: Increases Assets.
Credit: Decreases Assets.
Liability Accounts:
Debit: Decreases Liabilities.
Credit: Increases Liabilities.
Revenue Accounts:
Debit: Decreases Revenue.
Credit: Increases Revenue.
Expense Accounts:
Debit: Increases expenses.
Credit: Decreases expenses.
Practical Application of Credit and Debit:
Here are some examples of the double-entry system:
- Sale of Goods:
When a company sells goods worth 100,000 riyals for cash:
The amount of 100,000 riyals is recorded on the debit side of the cash account due to the increase in assets.
The amount of 100,000 riyals is recorded on the credit side of the sales account due to the increase in revenues.
- Payment of Salaries:
When a company pays its employees salaries in the amount of 80,000 riyals:
The amount of 80,000 riyals is recorded on the debit side of the salaries expense account due to the increase in expenses.
The amount of 80,000 riyals is recorded on the credit side of the cash account due to a decrease in assets.
- Obtaining a Loan:
When a company obtains a bank loan in the amount of 500,000 riyals:
The amount of 500,000 riyals is recorded on the debit side of the cash account, increasing assets.
The amount of 500,000 riyals is recorded on the credit side of the bank loans account, due to the increase in liabilities.
In this method, the double-entry system demonstrates how each financial transaction impacts the accounting records.
What is the concept of credit and debit in modern technologies?
- The Impact of Artificial Intelligence on Accounting:
Modern accounting is witnessing significant development thanks to advanced technologies in the fields of artificial intelligence (AI) and machine learning (ML). These technologies have become an effective tool in improving the efficiency of accounting systems through:
- Automatically detecting errors in credit and debit entries, reducing the likelihood of human error.
- Immediately correcting unbalanced transactions, contributing to ensuring the accuracy of financial records.
- Predicting financial trends by analyzing credit and debit movement patterns, enabling management to make informed proactive decisions.
The integration of AI into accounting is not limited to automation alone; it also contributes to enhancing data accuracy and the quality of financial analysis.
- Blockchain and Accounting:
Blockchain technology redefines the concepts of credit and debit by:
- Creating distributed and transparent records.
- Ensuring that entries are tamper-proof.
- Facilitating review and auditing processes.
What do you know about debit and credit accounts in LOGIX?
When you perform any transaction in LOGIX accounting book, the following occurs:
- Automatic Transaction Recording:
LOGIX accounting software is characterized by its ability to automatically create accounting entries when any financial transaction is conducted. The system immediately posts transactions to the appropriate accounts, whether in the debit or credit accounts within the comprehensive chart of accounts, and without the need for any additional verification or manual recording of entries in the accounting records.
- Financial Performance Management and Analysis:
By carefully controlling the parties to daily and ongoing accounting transactions, you can easily monitor and track profits and losses.
The system also provides you with the ability to analyze financial performance in real-time and on an ongoing basis, enabling you to make informed decisions based on accurate data to achieve the highest possible levels of profitability for your business.
Achieve maximum profitability with LOGIX accounting system!
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